Risk & Compliance

Prosecutors End Cross-Examination of Lay

"Aggressive accounting does not mean illegal accounting," argued former Enron chairman Kenneth Lay in his final day of sparring with prosecutors.
Stephen TaubMay 1, 2006

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Prosecutors wrapped up their cross-examination of former Enron Corp. chairman Kenneth Lay after three days of testy, spirited exchanges.

In his final salvo, prosecutor John Hueston accused Lay of engaging in insider trading, pointing out that in late November, just three hours before an announcement that the merger of Dynegy and Enron had failed, the Linda and Ken Lay Foundation sold 500,000 shares of Enron stock, according to trial coverage by the Houston Chronicle.

“That was a decision that was made by my wife,” Lay reportedly explained, stressing that while he served on the foundation’s board, he did not participate in investment decisions. He added that insider trading charges were “totally unfair” and had nothing to do with his indictment, the paper reported.

Throughout the day, Hueston tried to prove that Lay worked hard to hide “aggressive accounting” from employees. Lay defended the accounting moves, asserting “aggressive accounting does not mean illegal accounting, Mr. Hueston.” The prosecutor reportedly responded: “What you and others call aggressive some have called criminal, isn’t that correct?”

“We do have a very dynamic capitalistic system that does allow great success and great failure . . . but failure does not equate to criminal activity,” Lay retorted, according to the Chronicle. Lay later repeated his defense of the accounting, noting with regard to off-balance sheet transactions, “I think many people misunderstood things [that were] new and different as being wrong.”

Lay also insisted that concerns raised anonymously by employees prior to a fall 2001 all-employee meeting were adequately addressed, according to the paper. After Hueston ticked off complaints raised by employees at the time, Lay reportedly responded, “Virtually all of these responses were anonymous,” though he stressed they were “all taken seriously.”

Asked Lay whether he ignored a voice mail from an Enron lawyer who was worried about accounting problems, Lay responded, “I don’t recall that,” according to the Chronicle. Hueston then asked Lay about an e-mail from an employee who compared Enron’s accounting practices to “crack cocaine,” reportedly charging, “I suspect you will say you don’t recall that one either.” Lay said he did not recall the complaint, the Chronicle reported.

Lay also shot back at Hueston, arguing that the prosecutor was distorting the story. “The corpse is on the gurney now, Mr. Hueston, and you’re carving it up the way you want to carve it up,” Lay reportedly said.

Attacked for ignoring warnings from former Enron executive and famed whistle-blower Sherron Watkins as well as others after the Wall Street Journal began investigating the company in October 2001, Lay again went on the offensive. “You’re mischaracterizing it, Mr. Hueston, as you are so many things,” he responded, according to the Chronicle.

In response to questions about damning testimony from prosecution witness Ben Glisan, a former Enron treasurer, Lay reportedly responded, “Mr. Glisan is under a lot of pressure from you and your associates and I suspect he’s quite willing to mold his testimony to fit your will.”

Hueston also argued that Lay lied to analysts and the media when he was asked about the name of the Raptor financial vehicles used by former CFO Andrew Fastow, noting that on Oct. 8, 2001, Lay told board members the Raptors were “the most contentious issue” currently facing Enron, according to the Chronicle. Why then, asked Hueston, did Lay tell the Wall Street Journal eight days later that he didn’t know the name of the financial vehicle being scrutinized? “It was an honest mistake, Mr. Hueston, a very honest mistake,” Lay reportedly said, adding that there were dozens of code names for projects at Enron and that at the time he simply didn’t recall the name Raptors.